This document discusses strategic sourcing from best cost countries (BCC). It provides an overview of key topics including: 1. The history and strategic drivers of global sourcing, both external factors like globalization and technology, as well as internal drivers like voice of the customer priorities. 2. The supply chain framework and BCC sourcing process, including objectives, evolving strategic sourcing approaches, and the DMAIC strategy for the sourcing process. 3. Tools for BCC sourcing like checklists, matrices for supplier selection and comparison, performance scorecards, and mechanisms for tracking spend profiles, cost reduction projects, and total landed costs. 4. Finally, it discusses managing the risks

1. Strategic BCC Sourcing – setting the
stage
April 21, 2010

2. OBJECTIVES
• History of Global Sourcing
• Strategic Drivers – External and Internal
• External Drivers in Today’s world
• Internal drivers - VOC
• Supply Chain Framework and Strategic BCC Sourcing Process
• Supply Chain Objectives
• Supply Chain Framework
• Evolving Strategic Sourcing
• BCC Sourcing Process – DMAIC Strategy
• BCC Sourcing Tools and Trackers
• BCC Sourcing Tactical tools
• BCC Supplier Selection Matrix
• Performance and Score carding
• BCC Tracking mechanisms
• Total Landed Cost
• BCC Landed Cost
• BCC Logistical Support
• Risks vs Benefits
• Managing Benefits vs Risks
• Risk management Tools
• Country specific core competencies and sensitivity
• Today’s BCC Sourcing People Profile
2

3. History of Global
Sourcing
3

4. A LOOK BACK IN HISTORY
4

5. Strategy Drivers –
External and Internal
5

6. EXTERNAL STRATEGY DRIVERS IN TODAY‟S WORLD
• LONGER AND MORE COMPLEX SUPPLY CHAIN
GLOBALIZATION • SHORTER PRODUCT LIFE CYCLES
• BLURRING OF TRADITIONAL ORGANIZATIONAL BOUNDARIES
• “BRIC” FACTOR –NEW MARKETS AND SOURCES OF SUPPLY
TECHNOLOGY AND
INFORMATION SYSTEMS • CONNECTION IN A FLAT WORLD
EMPOWERED CONSUMER • REQUIREMENT FOR BEST PRICE, BEST QUALITY AND BEST SERVICE
SUPPLY CHAIN • WAL-MART EFFECT
INTEGRATION AND • CUSTOMIZATION, VALUE ADDED SERVICES AND COLLABORATION IN SUPPLY
POWER SHIFTS CHAIN
• COMPETITIVE ADVANTAGE BASED ON SUPPLY CHAIN EFFICIENCY
• ECONOMIC DEREGULATION OR REREGULATION
GOVERNMENT POLICY • ENVIRONMENT AND SAFETY
AND REGULATIONS • SECURITY
• TRADE POLICY, TAX POLICIES AND USER CHARGES
6

7. INTERNAL STRATEGY DRIVERS - VOICE OF THE CUSTOMER
Voice of the Customer Metric Actual comments from internal
customers–
35%
31%
30%
25% • Quicker lead time on requests
25%
20% • Why won’t they ditch us when times
20% are good or if they get a higher margin
15% business
11%
10%
10% • Would they charge higher prices for
lower volume or would they have a
5% 3%
minimum volume threshold
0% • We would love to get finished
Price Quality Delivery Capacity Customer Other
Service
assemblies as opposed to component
material only
• With them being a world away and
with the time difference and language
issues, how would they ensure
customer service coverage
• China is known to have quality issues
– would our quality deteriorate
Areas of focus: • Can they help us manage our
Price inventory better
Quality
Capacity
Delivery / Customer Service
7

8. Supply Chain
Framework and
Strategic BCC
Sourcing Process
8

9. KEY SUPPLY CHAIN MANAGEMENT OBJECTIVES
Improving the linkage: Strategy - KPI’s - Performance
• Focus Areas Supply Base
• Providing Business Value (Cost, Supplier Scorecard
Quality, Delivery, Inventory)
• BCC Sourcing optimization on
ati Co
• NPD integration and support n ov st
/ In
• Rationalizing the supply base NP
D Commodity
• Organizational development Operations / Supply
• Key Metrics Business
Strategy
very
• Deflation savings (PPV/PPI)
ory
ent
Deli
• x% of spend from Best Cost
In v
Countries
• Reduce supply base by x%
• Inventory reduction by $xxm Quality
• Launch supplier performance
program
9

10. ANALYSIS OF STRATEGIC BCC SOURCING PROCESS
ANALYZE SPEND: IDENTIFY REQUIREMENTS:
What are we buying Quality requirements
How many suppliers do we use Product Specs
Can we harmonize and consolidate Performance expectations
Analyze Identify Analyze Develop Manage Award and
IMPLEMENT
Spend requirements market Strategy Negotiations contract
ANALYZE MARKET:
Porter’s 5-forces analysis
Conditions of specific market
DEVELOP AWARD / IMPLEMENT:
STRATEGY/NEGOTIATE: Establish key performance criteria
Direct Negotiations Create comparison master
Rebates Establish specific LTA / terms
VA-VE Establish roll-out plan
Reverse auction
Traditional RFQ
10

11. DETAILED BCC BUSINESS PROCESS
Disciplined Approach, Operational Excellence, Business Results
11

12. BCC Sourcing Tools
and Trackers
12

13. GETTING DOWN TO THE TACTICAL
CHECK SHEET FOR OUTSOURCING PRODUCTS
Date:
Part Number:
Description:
Drawing & Rev.
RESPONSIBLE
COMPLETE
DESCRIPTION
INITIALS
ITEM
1 Cur r e nt Dr aw ing Pr ovide d. SC/Engg
2 All applicable de viations , DRR's and m odifie d m anufactur ing ins tr uctions include d. SC/Engg
3 All applicable m anufactur ing m e thods include d. SC/Engg
4 Othe r vis ual or not s pe cifie d infor m ation attache d (im plie d k now le dge ). SC/Engg
5 Ide ntify any s pe cial char acte r is tics or gauging. SC/Engg/QA
6 Supply m ar k e d-up par t that is pe r m ane ntly ide ntifie d: "Not for Dim e ns ional Re fe r e nce ". SC/Engg
7 Spe cial m achining k now le dge is s ue s ide ntifie d. SC/Engg
8 Pas t quality is s ue s /le s s ons le ar ne d. Engg, Q/A
9 Validation M atr ix Engg, Q/A
9 Lis t of all tooling/gauging pr ovide d. SC/Engg
10 Confir m gauge calibr ation. Engg, Q/A
11 Cle ar ly ide ntifie d e xpe ctations . SC
12 Sam ple s r e quir e d for our te s ting: _________ (qty). SC, Q/A
13 M anufactur ing change r e que s t. SC
14 Sam ple appr oval: par t, fixtur e , cavity or tool. SC, Q/A, Engg
15 Docum e nt contr ol. SC
16 Ram p up s che dule . SC
17 Spe cial te s ting r e quir e d: SC,Q/A, Engg
18
Re por ts /docum e ntation r e quir e d for s ubm is s ion: SC,Q/A, Engg
19 Othe r : ALL
Sign Off:
Parker US Cylinder Division Quality _____________________
Supplier Quality
Parker US Cylinder Division Supply Chain _________________
Supplier Purchasing
Parker US Cylinder Division Engineering _________________
Supplier Engineering
13

14. THE MORE INFO – THE BETTER
Vendor / Purchase Order Information
Vendor Details Ship To Details
Company Name
Contact Name
IQS Supplier #
Address
Zip code
Phone
Fax
Email
People -Copy on PO
Part Number Unit Price Order Qty. EAU Dwg. Number MS- Spec Alt. MS Spec Sup Matl
Shipping Information
Expeditors International is shipper required by Parker Hannifin, Contact Lisa Trevino with purchase order information
Special Notes
Special Processes Needed
Coatings Required
Standards Outside Parker to Meet
Packaging Requirements
Warehousing Requirements
14

15. SUPPLIER COMPARISON MATRIX
BCC Supplier Assessment
DATE REVIEWED 31-Mar-10
Scoring rules
SUPPLIER Incumbent Dom 1 BCC 1 BCC 2
SCORING (1,3,7,9) 9 7 3 1
IMPORTANCE
PIECE PART Over 20% 10-20% 5-10% Little or no
7 -1 7 9 7 reduction reduction reduction reduction
PRICING
Net 45 with pre- Net 30 with pre-
PAYMENT TERMS 3 7 3 1 7 payment payment Net 45 Net 30
discount discount
Basic
Excellent
support
CUSTOMER proactive Active support Limited
5 1 7 3 9 support - available
available.
support
SERVICE
Not
provides PCI
consistent
Committed YoY Committed for
OTHER COST Potential
7 3 7 3 9 in addition to finite period
discussed
None
SAVINGS
piece price only
Complete Web
ENGINEERING / Some
tool for part Limited
STANDARDIZATION 5 1 7 3 9 selection and
standardization
support
None
SUPPORT support
standardization
120 - 134 > 135
DELIVERY 9 7 3 7 9 < 90 days 90 - 119 days
days Days
INVENTORY > 25 Inventory 11 - 19 10 or less
7 1 7 3 9 turns
20 - 25 turns
turns turns
REDUCTION
IMPLEMENTATION 90-120 > 120
3 9 3 7 3 0 days 60-90 days
days days
TIME
SCORE >>> 142 262 222 376
15

16. S.C.O.P.E. - SUPPLIER PERFORMANCE MEASUREMENT AND SCORECARDING
In v e n t or y 20% Pr oce ss/ Re sp on siv e n e ss 5%
• GREEN – Preferred Suppliers 25%
In v e n t or y Mg m t Ty p e Ov e r all Re sp on siv e n e ss 100%
- Leverage Day s of Sup p ly 100%
Sup p lie r Scor e car d
75%
- Provide opportunity Over all sco r e t o b e
d et er m in ed b y
• YELLOW – Good Suppliers 10%
w eig h t ed aver ag e o f
. all t h ese cr it er ia
YoY Cost 40%
15%
- Move to green Le ad Tim e 10%
Pay m e n t SCAR
• RED – Needs Improvement Quan t it y
25% 80%
PPV Pe r ce n t
60% On Tim e
60%
- Move to yellow or exit
De liv e r y Tot al Cost Qualit y
25% 25%
25%
• Driving supply base accountability
• Robust mechanism to measure
Supply base performance
• Integration into supplier NPD
decisions
• Increased supply leverage
• Supply base rationalization
• Linking performance to “reward
opportunity” or “development
/corrective action”
16

17. ROBUST TRACKING MECHANISMS
Excellence in Total Supply Chain Management through
Spend Profile
Supplier Spend Database
Cost Reduction project Tracker
SPEND PROFILE
17

18. SUPPLIER SPEND DATABASE
Driving Supply Base Accountability/Development, Correct Sourcing Decisions & Your Leverage
OBJECTIVE:
Formalized supplier positioning and risk ratings can be
used in Growth/Exit strategies
Facilitates accurate supplier strategy deployment
Buyers can reference this for all sourcing/selection
decisions
Can be utilized by quote cells for accurate estimating
decisions
18

19. COST REDUCTION PROJECT TRACKER
•Drives overall material cost reduction strategy
STRATEGY
•Ensures proactive instead of reactive focus on
PROJECTS unfavorable PPV / PPI
•Ensures a formalized project based process to
RESULTS drive cost savings target
•Drives behavior and accountability to execute
ASSESS targets - Accurate measure of PPP
•Provides quantitative and qualitative view into
REPEAT YTD deflation performance
•Identifies root causes for missed cut-in dates
•Can be utilized for annual/STRAP planning
19

20. PROCESS FLOW FOR STRATEGIC BCC SPEND MANAGEMENT
PLANNING
•Identify spend profile
•Pareto 80-20 supplier spend segmentation Strong project
management
•Develop spend strategy by country focus to
•Identify current suppliers to re-source/exit drive
effective
•Establish qualified supply base by categories in BCC execution
EXECUTION
•Execute a disciplined robust BCC business process
•Establish and implement measurable tracking mechanism
•Establish a defect containment process
•Establish an objective supplier evaluation process
•Stratify the BCC supply base based on key criteria:
-Relationship/risk type
-Strategy/Performance ranking
•Formalize supplier rating
•Establish a quantitative growth/exit process
20

21. Total Landed Cost
21

22. KEY COMPONENTS OF LANDED COST
1 Costs of assists
2
Cost of special export packaging
3 Transportation / Port handling (inland/wharfage/loading/freight-fwd)
4 Export processing fee
5 Warehousing charges
6 Ocean / air shipment
7
Marine insurance premiums If applicable,
consider product
8 Customs house broker fees postponement
and/or FTZ
9 Customs duties
10 Finance charges
11 Foreign exchange and/or material hedging costs
12 Additional inventory carrying cost
:
:
22

23. COMPLEXITY OF TARIFF SCHEDULES
Chapter:
Chapter 18: Cocoa and Cocoa Preparations
Heading:
1806: Chocolate and other food preparations containing cocoa
Sub-Headings:
1806.20: Bulk chocolate preparations more than 2 kg
1806.31: Filled chocolate in blocks, slabs or bars
1806.32: Unfilled chocolate in blocks, slabs or bars
1806.90: Other chocolate
Country Classifications:
Australia China EU
Chocolate Crumb 1806.20.0019 1806.20.00 1806.20.7000
Snickers 1806.31.0011 1806.31.00 1806.31.0090
Dove Bar 1806.32.0013 1806.32.00 1806.32.9099
Dove Miniatures 1806.90.0017 1806.90.00 1806.90.3900
23

24. Risks vs Benefits
24

25. BENEFITS OF GLOBAL SOURCING
• Costs and Efficiencies
• Lower labor cost
• Lower land and facility cost
• Lower taxes
• Government subsidies
• Strategic
• Bringing value-add to the product line
• Reducing risk in the supply base by cutting out the middleman
• Penetration of growth market
• Promotes healthy competition between suppliers
• Conforming to industry standards and providing options to customers
• Value
• Improved quality
• Improved delivery and reliability
• Improved new product introduction
• Creates part-family realignment (supply base rationalization)
25

26. HIDDEN COSTS OF GLOBAL SOURCING
• Costs and Efficiencies
• Transport, travel, corruption, processing and legal fees
• Bureaucracy
• Customs requirement
• Strategic
• Piracy / Abuse of IPR
• Language, cultural and time issues
• Security issues
• Value Cost of running out
far exceeds
the cost of
carrying
• Quality issues
• Lower responsiveness
• Long lead time – higher inventory implications
26

27. KEY RISKS
1 Supply Chain disruptions
2
Currency fluctuations
3 Availability of raw material
4 Environmental concerns
5 Social responsibility concerns
6 Domestic job loss - EFCA
7
Regulatory and legislative changes
8 Exposure to local economic, social and political conditions
9 Cultural variations – communication issues
10 Natural disasters / Terrorism / Global pandemic
11 Strikes and demonstrations
12 Date format
Always have a
contingency plan
:
:
27

28. RISK EXAMPLES
• Nokia and Eriksson used the same chip supplier. After a fire shutdown the supplier‟s manufacturing
units, Nokia bought all capacity at an alternate source and prevented Eriksson from selling that
particular phone for 1 year
• Nike‟s reputation was severely affected due to alleged practices at their supplier
• Approximately 10000 containers a year are lost overboard
• Heavy seas can damage containers and contents
• The 2004 South East Asia tsunamis resulted in several shutdowns due to lost containers and / or ships
• Motorola closed a plant in Singapore due to 1 worker being infected with SARS
28

29. CULTURAL RISK
• A golf ball manufacturing company packaged golf balls in packs of four for convenient purchase in
Japan
• Unfortunately, the number 4 is inauspicious (it sounds like the word "death“) in Japanese
• The company had to repackage the product
• Pepsodent tried to sell its toothpaste in South East Asia by emphasizing that it "whitens your teeth“
• They found out that the local natives chew betel nuts to blacken their teeth which they find attractive
• Staff at an African port saw the „internationally recognized‟ symbol for “fragile” and presumed it was a
box of broken glass Rather than waste space they threw the boxes in the sea
• One company printed the "OK" sign on each page of its catalogue. In parts of Latin America that is
considered an obscene gesture. Six months of work were lost because all catalogues had to be reprinted
• Coors had its slogan, “Turn it loose," translated into Spanish, where it became "Suffer from diarrhea”
• IKEA once tried to sell a workbench called FARTFULL - not a hugely popular product for obvious
reasons
29

30. RISK MANAGEMENT TOOLS Hi
CORE
DEVELOPMENT
Customer
Preferencing
Attractiveness
of Account NUISANCE EXPLOITABLE
Lo
Lo Hi
% of Sales
Risk Risk Risk
Supplier
Positioning * Customer
Preferencing = Relationship
Rating x Severity
Rating
x Occurrence
Rating
= Management
Score
• Relationship Rating: • Risk Severity Rating:
• 1=Extremely good • 1 = Very little impact if this supplier couldn't supply. Easily replaceable by
• 16=Extremely strained other suppliers
• 5 = Some impact if this supplier couldn't supply. Temporary line shutdowns
• Risk Occurrence Rating: imminent. Will take some time to get a replacement solution with medium
• Based on financial position of the level of engineering/testing support. Other suppliers are available with some
supplier, labor situation at the technical modification.
supplier and economic factors at • 9 = Substantial impact if this supplier couldn't supply. Extremely long lead
supplier's country of production times. Highly specific component. Long validation time due to
• 1 = Very little risk of supply safety/technical requirement. Could shut down line for a few weeks or longer.
disruption (<20%)
• 5 = Medium risk of supply disruption
(20%-70%)
•
30 9 = Great risk of disruption (>70%)

31. COUNTRY SPECIFIC CORE COMPETENCIES
31

32. NUANCES OF RELATIONSHIP WITH CHINESE SUPPLIERS
• Great emphasis on relationships
• Guanxi = relationship (critical to success)
• Many hours spent in socializing
• Want to understand their business partners 1st
• Want to please their customers
• Very polite
• Meiwanti - no problem - Hesitant to say “no”
• Ask & ask again
• Great “can-do” attitude
• Greater familiarity with American customer base
• Never “lose face”
• Major blow to embarrass China host
• Find diplomatic ways to work around issues
• Direct attacks generally don’t end well
32

33. NUANCES OF INDIA
RELATIONSHIP WITH INDIAN SUPPLIERS
• Great emphasis on relationships
• Initial socialization to understand customer
• Interaction is more on equal footing
• Polite and low key wins respect
• More emphasis on position/title than China
• Communications
• Much more direct in communications/opinions
• “Let us see where we can be”
• English used widely in business
• Do not break chain in communications
• Generally “top down” management style
• Time could be a fluid concept – IST!
33• Greater familiarity with European customer base

34. BEWARE………
• Mispronunciation of names / companies
• If you don’t know – ask
• Asian companies consider slips disrespectful
• Do not automatically use first names
• Being impatient not well tolerated
• Projecting the feeling of superiority not well tolerated
• Make communications as clear as possible
• Don’t expect automatic understanding
• Don’t be abrupt/short
34

35. Today‟s BCC Sourcing
People Profile
35

36. TODAY‟S GLOBAL SUPPLY CHAIN PROFESSIONAL
Boundary less Thinker Network Builder
• Thinking beyond the status quo • Finding and linking with complementary partners
• Big picture perspective • Relationship mindset
• Openness to ideas • Knowledge of own value and core competency
• Willingness to look beyond oneself for capabilities and • Ability to recognize others‟ value and core competencies
resources • Search for synergy
Diplomat Interpreter
• Developing the skills to manage networks • Helping partners see the benefits of working together
• Ability to relate • Ability to influence others
• Ability to communicate • Solid knowledge of business
• Ability to negotiate • Broad knowledge of marketplace
36

37. CONTACTING THE SPEAKER
DIBYAVA GHOSH
dibyava.ghosh@parker.com
847 331 2986
37

38. Thank you
38